While most everyone knows they have a credit score that creditors use as the end-all and be-all of a consumer’s financial responsibility, I would bet just as many don’t know who – and especially how – their magical three number credit score is determined. 
 
Well, we can all thank Fair Isaac & Co.  for coming up the FICO score (or credit rating) that roughly 90% of U.S. banks use to judge our worthiness.  And if one wasn’t enough, we have three scores, one from each of the major credit reporting agencies.  Our scores come from information the credit bureaus keep on file about us and change over time.  While this score isn’t an exclusive indicator of whether or not we’ll be approved for a loan or get a credit card, it’s as close as you’ll get.

So how do they do it?  Each credit bureau has their own formula and lenders are not required to use any specific calculation, but here are the basics of how our score is determined:

        1. Payment History – About 35% of your score comes from payment information on your accounts, whether paid in full dutifully every month or 6 months delinquent. 
        2. Amounts Owed – About 30% comes from amounts owed on your accounts, what kind of accounts they are and how many carry balances.
        3. Length of Credit History – About 15% comes from how long an account has been open and when it was last used.
        4. New Credit – About 10% comes from the number of new accounts opened and the number of new inquiries into your credit report.
        5. Types of Credit Used – Finally, another 10% looks at the types of accounts you have (credit card, retail account, mortgage etc.) and the prevalence of information on each.

Hopefully this brief look will help the next time you’re wondering why three numbers can be your best friend or worst enemy.

For help in obtaining a free copy of your credit report, click here. 

--Attorney Adam Cerza
--BankruptcyHQ.com

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Many people think that if you’re currently enrolled in college or a school program, you’re not allowed to file for bankruptcy. Nothing could be further from the truth! Bankruptcy laws only require that you be 18 years old, a resident of the state where you are filing from for the last two years, and be capable of making the choice to file bankruptcy voluntarily. So don’t let the fact that you’re still a student stop you from filing for bankruptcy if that’s the relief you need.

In fact, college can be the best time to file a bankruptcy. Your student loans are still in deferment, so you won’t even have to worry about them in the filing itself. Also, you won’t have that high paying salary that might actually keep you from being able to file an easy Chapter 7 liquidation until after you graduate. Why hold on to those debts until you have to pay them back for at least a three year time period? File now and save yourself the trouble.

Also, don’t worry that by filing for bankruptcy you’ll never be able to get another credit card. Most people who file for Chapter 7 bankruptcy see a flood of credit card offers after they file. The credit card companies know that you wont be eligible to file another Chapter 7 for eight more years, so to them, you are a safe bet. The trick is to read the fine print on those offers. Of ten times, they’ll start off with a twenty to thirty percent interest rate. Be selective and choose one with a ten to fifteen percent rate. Use it like a debit card and pay the balance back to zero at the end of each month. In no time at all, you’ll find your credit score steadily improving.

Once your credit has improved, you can think about financing a car, or maybe even purchasing a home, and you’ll be in good shape to do so. It’s all because you filed for bankruptcy while you were in college and then practiced responsible credit behavior after you graduated. When all’s said and done, people wont need to see your diploma to know how good you are at making the right decision.

Just remember, always consult an attorney who specializes in bankruptcy law. They know all the ins and outs to get you back on your feet and on your way to a great future. Until then, keep your eyes on the prize.

-JH, Attorney

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It’s no secret that people have a lot of trouble paying down their credit cards. Take me for example. I got a credit card in my early twenties (I won’t say which one, but it starts with an ‘A’, and ends with a ‘merican Express’.) That zero percent interest rate sounded great, and for the first few months everything was just fine. I made my payments on time, and was on my way to establishing good credit. Then, I somehow missed a payment. Perhaps my finances were tight that month, or I just misplaced the bill. The reason didn’t matter to my credit card company though. They started charging me thirty (that’s 30) percent interest and soon, what had been a measly $500.00 debt was over $3600.00.

Now, I’ll accept the blame for missing the payment, and when I went back and checked the contract, sure enough, miss a payment and get the interest rate jacked up. As a young man who was still trying to find his way in life, I tried to make the minimum payments, but I soon found that by making those minimum payments I would never actually pay down the debt to zero, or at least I wouldn’t before I was fifty years old.

About this time I started practicing as a bankruptcy attorney, and I discovered something. I was not the only one in this sort of situation. All my clients were too! All across the spectrum, from police officers to construction workers to office managers to salespeople, everyone was being crushed by the interest rates on their credit cards. I was one of the lucky ones with only one card to worry about, but imagine that same problem with three, four or five credit cards, all with thirty percent interest! It’s outrageous! And then, there were the people who thought at the very least they could reduce the number of credit cards and make their debt more manageable. They paid off one card with another, and their installments were still too high to make more than the minimum monthly payment.

The madness has to end sometime though. People are smart, and we will all eventually realize when we’re in over our heads. That’s when it’s time to seek help. And please, whatever you do, don’t seek help from a ‘Debt Consolidation Agency.’ First of all, there is nothing anywhere that says that all your creditors have to go along with the repayment plan. They can opt out, and still be waiting for you in the end, with all the interest that you’ve accrued. Second, Debt Consolidation Agencies can take up to Forty percent of what you pay them every month as service and administrative fees. That means that for every $100.00 you pay them, only $60 is actually going to pay back your debt. Not a good deal at all.

So, talk to a professional. If your debt is more than you can manage, perhaps it’s time to give yourself a fresh start, or at least work out a repayment plan with the full power of the law behind it. Contact an specialized attorney and find out if bankruptcy is right for you.

Until then, keep your eyes on the prize.

-JH, Attorney

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Many of my bankruptcy clients would be very anxious about having to “go to court” during their bankruptcy proceeding. Most of these fears were based on misconceptions and horror stories that simply aren’t true.

In a typical bankruptcy case, you don’t ever actually see the bankruptcy judge or “go to court”, you simply meet with a court appointed trustee at a “341 Meeting of the Creditors”, named after section 341 of the bankruptcy code. The trustee’s job it is to oversee the bankruptcy process and represent your unsecured creditors.

Your Meeting of the Creditors will typically take place 30-45 days after the bankruptcy is filed. In the majority of bankruptcies, these meetings are relatively simple and painless for the debtor and most meetings in a Chapter 7 bankruptcy last as little as 5-10 minutes. In a Chapter 13 bankruptcy , the trustee also has to go over your budget to ensure that the proposed payment plan is feasible, so they can take a little longer to complete, but usually aren’t more than 20 minutes.

The trustee will swear you in under oath, ask some questions to make sure that you are eligible to file bankruptcy, verify your social security number, and examine your bankruptcy schedules for any irregularities. If you hired an experienced bankruptcy attorney to prepare your paperwork and fully disclosed all relevant information, then there shouldn’t be any surprises. Each State has exemptions that allow you to protect all or a portion of your assets and the majority of bankruptcy cases end in a finding of “No-Assets”, meaning that all of your property is protected from your creditors.

Although it is referred to as the “Meeting of the Creditors”, it is unlikely that any of your creditors will actually attend the Meeting. Sometimes your secured creditors will attend the Meeting to offer a Reaffirmation Agreement on your secured debts. By signing a reaffirmation agreement, you are able to keep any property that you pledged as collateral for the loan by agreeing to repay the debt even though you’ve filed bankruptcy. You’re under no obligation to reaffirm any debts, and you should consult with your bankruptcy attorney before signing any reaffirmation agreements.

Many clients ask “Was that it?” after the completion of their Meeting and can’t believe how dignified and simple “going to bankruptcy court” was.

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A common scenario that we as bankruptcy attorneys often see in personal Chapter 7 bankruptcies is when our clients have equity in their real estate in excess of the Illinois homestead exemption. In Illinois, a Chapter 7 bankruptcy filer is allowed to protect, keep and exempt up to $15,000 of equity in their homestead property, and the exemption doubles to $30,000 for married joint filers.  To qualify for this Illinois “homestead” exemption, you generally must be able to show that you lived in the property in question at the time of the Chapter 7 bankruptcy filing.

Real estate equity is determined by taking the real estate’s fair market value and then subtracting a reasonable cost of sale percentage in addition to any liens that exist on the property.  The Northern, Central and Southern Districts of the Illinois Bankruptcy Courts all generally accept a 7% cost of sale reduction to account for any broker fees, real estate taxes, etc. at the time of sale.   So in an example where an unmarried person owns a homestead property worth $200,000 that has a $120,000 mortgage on it (and no other liens), the formula would look like this: $200,000 – 7% cost of sale = $186,000 - $120,000 mortgage = $66,000 - $15,000 homestead exemption = $51,000 of exposed equity.

Many options exist for bankruptcy clients who have equity in their home in excess of the Illinois homestead exemption:

1) Consider Filing a Chapter 13 Bankruptcy
Typically the most advisable and best option given by bankruptcy attorneys to clients who need the relief of the bankruptcy code but at the same time want to keep their home is to file a Chapter 13 bankruptcy.  In a Chapter 13 bankruptcy, the filer is allowed to repay the equivalent amount of excess equity that’s unprotected by the homestead exemption and therefore keep their home.  Chapter 13 bankruptcies are consolidation repayment plans that are based on a filer’s household disposable income and will range anywhere from 3 years at a minimum to 5 years at a maximum.   To be able to qualify for a Chapter 13 bankruptcy, a filer must demonstrate that they have the sufficient, steady monthly income to support a feasible repayment plan based on their subjective circumstances.

2) Selling the Real Estate Prior to Filing
The Illinois homestead proceeds of sale exemption allows a Chapter 7 filer to keep up to $15,000 in proceeds of sale of a homestead that has been sold within one calendar year prior to the filing of the Chapter 7 bankruptcy.  This exemption also doubles to $30,000 for joint filers.   While it makes most sense for those who are willing to part with their home, this option can be extremely beneficial in that allows qualified Chapter 7 bankruptcy filers to receive a discharge on their unsecured debt, and at the same time retain the cash equity from the sale of their former home in a Chapter 7 bankruptcy filing.  Note: It’s important to remember to not commingle any of the sale proceeds with your general funds in this scenario.

3) Surrendering the Real Estate to the Bankruptcy Court
Another option is to file a Chapter 7 bankruptcy knowing that excess equity in the homestead exists, and allow the Chapter 7 Trustee to sell and liquidate the real estate.  In this scenario, the Chapter 7 Trustee will pay the individual filer their $15,000 proceeds of sale exemption ($30,000 for married filers) out of the equity from the sale.  Any funds gained from the sale of the property in excess of the exemption will be used by the Chapter 7 Trustee to repay the Chapter 7 filer’s creditors. 

4) Chapter 7 Trustee Buyout
This option allows a Chapter 7 bankruptcy filer to keep their property, but at a literal cost.  A Chapter 7 filer must produce matching cash funds to cover the equivalent monies that a Chapter 7 Trustee would receive if they sold and liquidated their homestead in a Chapter 7 bankruptcy.   This large cash amount is usually obtained by Chapter 7 filers refinancing the equity out of the property and turning the proceeds over to the Chapter 7 Trustee.  However, this option can be risky and is not usually advisable in that it can often be difficult to qualify for real estate refinancing after the filing of a Chapter 7.

Andrew Partridge, Esq.
BankruptcyHQ.com

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A recent article in The Arizona Republic reports that August bankruptcy filings in Arizona increased 65 percent from 2006 filings. Arizonans filed 1021 bankruptcy applications in August, 2007 up from 617 in August 2006. Bankruptcy filings are also increasing nationwide, up 31 percent from August 2006.

Although the article doesn't get into the specifics of why such a large increase in Arizona bankruptcy filings was seen, I believe it can be largely attributed to the rapid increase in foreclosures seen in Arizona.

According to data compiled by RealtyTrac , foreclosures in Arizona nearly tripled in July from 2006 - the eight largest increase nationwide, putting Arizona into the top 10 states for foreclosures.

I expect that a large number of the Chapter 13 bankruptcies filed where individuals attempting to save their homes from foreclosure by getting the protection of the automatic stay. Filing a Chapter 13 bankruptcy is a viable option that can order a mortgage company to stop the sale of your property and give you up to 3 years to repay any arrearage.

As foreclosures continue to rise in Arizona and many states, I expect it will cause a similar increase in Chapter 13 bankruptcy filings.

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If you have a serious injury or illness you are likely to rack a up a large amount of debt and possibly face a reduction or loss of income. This is a financial combination that usually ends in filing bankruptcy.

In fact, medical bills and illness is the leading cause contributing to bankruptcy filings according to a study published in Health Affairs . The study, conducted by researchers at Harvard Law School and Harvard Medical School, found that medical problems contributed to about half of all bankruptcies. The author of the study, Dr. David Himmelstein commented: "Unless you're Bill Gates you're just one serious illness away from bankruptcy. Most of the medically bankrupt were average Americans who happened to get sick."

If you are unfortunate enough to incur major medical bills, you can quickly find yourself in huge amounts of debt in a very short period of time, especially if you are one of the 44.8 million Americans who doesn't have health insurance.

Things aren't necessarily much better even if you do have health insurance! The study reported that most people who filed bankruptcy because of medical problems actually had health insurance. Uncovered medical debt averaged $13,460 for individuals with private insurance at the start of thier illness. The combination of high deductibles, co-pays, and exclusions can quickly reduce the amount coverage your insurer will provide. Without the ability to perform the same jobs, many also see a dramatic reduction in income.

This study highlights the fact that bankruptcy is designed for unfortunate individuals who have no realistic way of ever paying off their debt and truly need a fresh start.

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California based United States Bankruptcy Judge Louise DeCarl Adler ordered 42 clergy sex abuse cases against the Catholic Diocese of San Diego to go to trial recently. Judge Adler accepted the molested parties plaintiff attorneys' arguments that trial would likely force the San Diego Diocese to settle and resolve the sex abuse claims made against their priests. In February of 2007, these trials were suspended the day before they were scheduled to begin when the San Diego Diocese filed for Chapter 11 bankruptcy protection.

Thus far, the Diocese has offered to settle with the victims of these heinous crimes for roughly $94 million. This amount is far short of the $200 million claimed by plaintiffs attorneys, who assert that the Diocese can afford more even though they are currently under Chapter 11 Bankruptcy protection. The victim's attorneys also have stated that any less amount than a $200 million settlement would be insufficient to their clients for the damage and harm they have suffered. The trials have yet to be scheduled, but it is possible the first of the claims could begin within the next two months.

Filing for Chapter 11 bankruptcy relief has become a pattern for our nation's Catholic Dioceses. In January 2007, the Spokane Catholic Diocese settled molestation claims against its clergy for $48 million to be repaid through its Chapter 11 bankruptcy reorganization plan. The Archdiocese of Portland, OR, Tuscon, AZ, Spokane, WA and Davenport, IA have also filed for Chapter 11 bankruptcy protection in response to the hundreds of sexual abuse lawsuits against their respective priests and clergy.

--Andrew Partridge, Esq.
--BankruptcyHQ.com

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Edward C. Sanchez, Debt Reduction Specialist, has developed a debt reduction process to help you break the debt cycle and pay down your debts. The information draws from the knowledge Edward has gained from his extensive experience interacting with individuals considering bankruptcy.

The FreshStartForms.com Debt Reduction program uses the "B.A.M" Process, a unique 3 step process that fundamentally change the way you consume on a daily basis. The steps are 1) Budget, 2) Audit, 3)Monitor.

After completing the B.A.M process you will have established a realistic picture of your complete financial situation. It is critical to have this information to determine if bankruptcy alternatives are available to you.

Visit www.freshstartforms.com to learn more.

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Credit cards, medical bills, repossessions, utility bills and most other unsecured debts are dischargeable in a Chapter 7 bankruptcy . Secured debts, like mortgages or auto loans, usually can be discharged only if you are willing to surrender the property that was used as collateral. Otherwise, you can typically keep the property if you are current and continue making timely monthly payments.

However, a handful of debts cannot be eliminated in a Chapter 7 bankruptcy. These include Student Loans, some IRS or State Income Tax Debts, Child Support or Alimony Obligations, Government Fines, and some debts ordered by a divorce decree. Congress drafted the bankruptcy laws and in their own interests made it very difficult to file bankruptcy on any government debt.

What bankruptcy options do you have if you are burdened with these non-dischargeable debts?

Individuals who have non-dischargeable debts are also often facing other financial difficulties and are in a cycle of debt that includes credit cards, loans, and other unsecured debts. One option is to file Chapter 7 bankruptcy to eliminate any unsecured debts and legally stop making any more payments to your unsecured creditors; this will free up some disposable income and allow you to focus on repaying any debts that survived the bankruptcy. Although the non-dischargeable debts will not be eliminated, the broad protection of the automatic stay may give you some protection from government creditors during the bankruptcy, absent a court order lifting the stay from the bankruptcy judge.

A second option is to file a Chapter 13 bankruptcy and include your non-dischargeable debts in the court monitored repayment plan. It is possible to repay only a portion of your non-dischargeable debts back while you are in the bankruptcy, but you’ll still be liable for the percentage that wasn’t paid back after the bankruptcy. The advantage is that the bankruptcy laws prevent even government creditors from garnishing your wages or harassing you while you are actively in a Chapter 13 bankruptcy. With a little breathing room from your creditors and the ability to eliminate a portion of your unsecured debts, you have sufficient opportunity to increase your income or make other arrangements for repaying the non-dischargeable debts after the bankruptcy

I recommend Requesting a Free Legal Evaluation from a local bankruptcy attorney to help determine which option is right for your situation.

Attorney Richard J. Waple, www.BankruptcyHQ.com

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